Issue 105: Monday Post-Expiration Breakout Trades - Masters in Trading Digest

Monday Post-Expiration Breakout Trades

Just as earnings occur every calendar quarter, and Masters In Trading deploys its unique way of trading Earnings Season, Volatility Visualizer – specifically its new scanning components – comes into play during the first week of monthly options being “front month.”

3rd Quarter Earnings Results Shared in MIT Digest Issue 104

8/19/2022 marked a “3rd Friday” of the month and the August monthly equity options expire. Monthly options expire on the 3rd Friday of each month.

PDF – CBOE options expirations

Lots of Open Interest matured and stocks that were “pinned” at a level due to large options interest at that level suddenly become “unpinned.” 

New weekly and monthly ranges are painted on the Volatility Visualizer, and a new set of cycles begin.

Volatility Visualizer Monthly Expected Move in IBM.  3-Yrs Data; IMB closes within its Expected Move 81.08% of the time.

Each time a monthly contract matures, the next one becomes the front month. We refer to each such event as a “monthly cycle.”

As an example, on 8/19/2022, the August options expired, and the September options became front month.

* The close on Friday, 8/19/2022, marked the end of a weekly cycle AND of the August monthly cycle

* The open on Monday 8/22/2022 will mark the start of a new weekly cycle, AND the start of the September monthly cycle.

Volatility Visualizer Weekly Expected Move in IBM.  Year-to-date, IMB closes within its Weekly Expected Move 68.42% of the time.

Timely Trade Opportunity 

From personal empirical experience, the first week in an options monthly cycle has shown statistical significance – more so than any other period during the monthly options life-cycle.  

We take advantage of this set-up often in our weekly Friday Breakdown sessions. Usually, this window is between 1-5 days from the start of the monthly cycle, effectively the entire first week.

* The sooner it happens during the week, the better the signal – ie, Day 1 (Monday) signals tend to be stronger ones than Day 5 (Friday) signals.

If during Monday/Tuesday/Wednesday trading sessions we get some names that match the “outside weekly and inside monthly” criteria, these are the names I'll be keeping a close eye on for the rest of the month. 

Names present on Thursday and Friday will also be monitored but have a “lower ranking.”

This takes care of the first challenge – finding the stocks to trade.

Challenge 2 is picking a direction. 

Thankfully, Volatility Visualizer takes care of that for us as well. If the scan yields some names during Monday's session, there will likely be a mix of upside and downside breakouts.  We simply follow the direction of the breakout.

This is frankly the only exception I can think of where I like trading along with the market instead of against it.

Does this mean that the Volatility Visualizer scanner is only good during the 1st week of the monthly options? No, not at all. 

The scan is relevant regardless of when the signal happens. However, something statistically significant about names produces the signal early in week 1 of the monthly cycle. I don't know why – all I know is that I’ve seen it continue to work.

The trade setup is pretty simple:

If a stock shows up on the scan, the trade consists of buying put or call options with the goal of taking profits when the price reaches the monthly upper or lower bands (depending on the direction of the early-week breakout.)

Thus a downside breakout – purchase puts with expected support at lower monthly bands. Upside breakout – purchase calls with expected resistance at the upper monthly bands.

Pablo – Masters in Trading Tooling

Masters in Trading Digest - Issue 105

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FINAL THOUGHTS

WHAT TO EXPECT IN THE NEXT MIT DIGEST

The next issue will be released on Wednesday. 

The Volatility Visualizer has been a life-saving trading tool in the face of rising interest rates, spiking inflation, and market volatility.  Watch this 7 Video Series to See How the Volatility Visualizer can help you find high-probability trades.

Until then, trade smart and always manage your tail risk.

Thanks for reading,
Jonathan Rose

P.S. You do not want to miss this >>>new options video<<<.

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